Entrepreneurship and Effective Small Business Management, 11e (Scarborough)
Chapter 6 Franchising and the Entrepreneur
1) In franchising, a ________ pays fees and royalties to a ________ in return for the right to sell
its products or services under the franchiser’s trade name and often to use its business format and
system.
A) franchiser; franchisee
B) franchisee; franchiser
C) franchise; business owner
D) business owner; parent company
Topic: What is a Franchise?
AACSB: Analytic Skills
2) Franchising is currently dominated by:
A) auto dealers.
B) service-oriented franchises.
C) retail outlets.
D) fast food restaurants.
Topic: What is a Franchise?
AACSB: Analytic Skills
3) ________ franchising exists when a franchisee is licensed to sell specific products under the
franchiser’s brand name through a selective distribution system.
A) Trade name
B) Pure
C) Conversion
D) Product distribution
Topic: Types of Franchising
AACSB: Analytic Skills
4) In ________ franchising, a franchisee purchases only the right to become identified with the
franchiser’s trade name.
A) trade name
B) pure
C) conversion
D) product distribution
Topic: Types of Franchising
AACSB: Analytic Skills
1
5) ________ franchising involves providing the franchisee with a complete business system—the
established name, the building layout and design, accounting systems, etc.
A) Product distribution
B) Trade name
C) Pure
D) Conversion
Topic: Types of Franchising
AACSB: Analytic Skills
6) Most gasoline products are sold through the ________ system of franchising.
A) product distribution
B) trade name
C) pure
D) conversion
Topic: Types of Franchising
AACSB: Reflective Thinking
7) McDonald’s is an example of a ________ franchise.
A) conversion
B) trade name
C) product distribution
D) pure
Topic: Types of Franchising
AACSB: Reflective Thinking
8) The success of franchising is largely due to:
A) the economic growth of the United States and other developed nations, economies.
B) more college students choosing to go to work for themselves rather than for corporations.
C) the mutual benefits it provides to the franchiser and franchisee.
D) All of these factors
Topic: Benefits of Buying a Franchise
AACSB: Analytic Skills
2
9) The ideal franchising relationship is a ________ based on trust.
A) corporation
B) partnership
C) sole proprietorship
D) social enterprise
Topic: Benefits of Buying a Franchise
AACSB: Reflective Thinking
10) A significant advantage a franchisee has over the independent small business owner is
participation in the franchiser’s ________.
A) centralized and large-volume buying power
B) social gatherings
C) profits
D) policies
Topic: Benefits of Buying a Franchise
AACSB: Analytic Skills
11) In view of the cause of most new business failures, probably the most valuable service
provided franchisees by the franchiser is:
A) management training and experience.
B) national advertising.
C) financial assistance.
D) territorial protection.
Topic: Benefits of Buying a Franchise
AACSB: Analytic Skills
12) Pure franchising is also referred to as:
A) trade name franchising.
B) business format franchising.
C) product distribution franchising.
D) all of the above.
Topic: Types of Franchising
AACSB: Analytic Skills
3
13) In franchising, the reputation of the franchiser is dependent on:
A) their locations and popularity with the local customer.
B) the brand name recognition and appeal.
C) the rate of growth and the number of national outlets.
D) the quality of the goods and services provided.
Topic: Benefits of Buying a Franchise
AACSB: Analytic Skills
14) Franchise advertising programs:
A) are organized by the franchiser but controlled locally by the franchisee.
B) are an expense borne by the franchiser.
C) require franchisees to spend a minimum amount on local advertising.
D) allow voluntary participation.
Topic: Benefits of Buying a Franchise
AACSB: Analytic Skills
15) When it comes to financial assistance for franchisees, the franchiser often:
A) provides direct financing.
B) assists in finding financing and occasionally provides direct assistance in a specific area.
C) waives royalty fees for franchisees not making an adequate profit.
D) generally does nothing, as finding financing is a requirement for qualifying for a franchise.
Topic: Benefits of Buying a Franchise
AACSB: Analytic Skills
16) The primary advantage of buying a franchise over starting your own company is:
A) in the purchase of the franchiser’s experience, expertise, and products.
B) the fact it is much less expensive than doing your own business start-up.
C) the extensive assistance offered in finding start-up capital.
D) the absolute territory protection offered by all franchisers.
Topic: Benefits of Buying a Franchise
AACSB: Analytic Skills
4
17) Most franchise experts consider the most important factor in the success of a franchise to be:
A) the simplicity of the idea.
B) location.
C) territorial protection.
D) financing.
Topic: Benefits of Buying a Franchise
AACSB: Analytic Skills
18) Territorial protection in franchising:
A) varies according to industry.
B) is basically every franchisee for him/herself.
C) is absolute and uniform across industries.
D) is no longer an issue for most franchisees.
Topic: Benefits of Buying a Franchise
AACSB: Analytic Skills
19) The failure rate for franchises is:
A) higher than the rate for all new businesses.
B) no different from the rate for all new businesses.
C) lower than the rate for all new businesses.
D) indeterminable because of the Right to Privacy Act.
Topic: Benefits of Buying a Franchise
AACSB: Analytic Skills
20) There are two main risks in purchasing a franchise. First, that of the franchiser’s experience
and business system, and second:
A) the brand name recognition of the franchise.
B) the entrepreneur’s managerial skills and motivation.
C) the franchiser’s financing.
D) the economy trends in the country at the time the franchisee begins operation.
Topic: Benefits of Buying a Franchise
AACSB: Analytic Skills
5
21) The first, second and third growth wave in franchising respectively, are:
A) low-cost franchises that focus on niche markets; shift to service sector; fast-food restaurant
using the concept of rapid growth.
B) fast-food restaurant using the concept of rapid growth; shift to service sector; low-cost
franchises that focus on niche markets.
C) low-cost franchises that focus on niche markets; fast-food restaurant using the concept of
rapid growth; shift to service sector.
D) shift to service sector; low-cost franchises that focus on niche markets; fast-food restaurant
using the concept of rapid growth.
Topic: Trends in Franchising
AACSB: Analytic Skills
22) Despite all the benefits, there are a number of disadvantages to franchises, such as:
A) the time consumed by the management training and support the franchiser provides.
B) the cost of national advertising.
C) strict adherence to standardized operations.
D) territory limitations.
Topic: Drawbacks of Buying a Franchise
AACSB: Analytic Skills
23) The most expensive franchises in terms of total investment are:
A) retail franchises.
B) business service franchises.
C) McDonald’s franchises.
D) hotel and motel franchises.
Topic: Drawbacks of Buying a Franchise
AACSB: Analytic Skills
24) The payment the franchisee makes to the franchiser based on gross sales is:
A) a royalty.
B) the start-up fee.
C) a technical assistance fee.
D) a national advertising fee.
Topic: Drawbacks of Buying a Franchise
AACSB: Analytic Skills
6
25) When it comes to purchasing products, equipment, etc., the franchiser:
A) cannot require the franchisees buy from the franchise company.
B) can set prices paid for the products, etc., but cannot set the retail price the franchisee charges.
C) is permitted to set the retail price for the franchisee.
D) cannot require franchisees to buy from an “approved” supplier.
Topic: Drawbacks of Buying a Franchise
AACSB: Analytic Skills
26) Typically, the franchiser controls are very tight on what the franchisee:
A) does in terms of who they hire as employees.
B) sets in terms of retail pricing and hours of operation.
C) does with his/her net profits after fees and taxes are paid.
D) sells in terms of the product or service they offer.
Topic: Drawbacks of Buying a Franchise
AACSB: Analytic Skills
27) The biggest challenge facing the growth of new franchises is:
A) the lack of capital.
B) competition from independent entrepreneurs.
C) market saturation.
D) the recent downturn in the economy.
Topic: Drawbacks of Buying a Franchise
AACSB: Analytic Skills
28) The primary market for U.S. franchisers is:
A) Europe.
B) Pacific Rim.
C) Canada.
D) Asia.
Topic: Trends in Franchising
AACSB: Analytic Skills
7
29) Based on the principle of ________, the idea is to put a franchise’s products or services
directly in the paths of potential customers, wherever that may be.
A) guerilla marketing
B) intercept marketing
C) franchise marketing
D) path marketing
Topic: Trends in Franchising
AACSB: Reflective Thinking
30) Another term for cobranding franchising is:
A) master franchising.
B) conversion franchising.
C) multiple-unit franchising.
D) piggybacking.
Topic: Trends in Franchising
AACSB: Analytic Skills
31) To protect investors from unscrupulous franchisers, the regulatory body is the:
A) FCC.
B) Justice Department.
C) FDA.
D) FTC.
Topic: Franchising and the Law
AACSB: Analytic Skills
32) The document that governs the relationship between a franchisor and the franchise is the:
A) FTC.
B) FDD.
C) UFOC.
D) FOC.
Topic: Franchising and the Law
AACSB: Analytic Skills
8
33) The FTC‘s philosophy focuses on:
A) catching and prosecuting abusers of franchise laws.
B) verifying the accuracy of FDD information.
C) providing information to prospective franchisees and helping them make good decisions.
D) licensing prospective franchisers.
Topic: Franchising and the Law
AACSB: Analytic Skills
34) Which of the following should make a potential franchisee suspicious about a franchiser’s
honesty?
A) Claims that the franchise contract is a standard one and that there’s no need to read it
B) An offer of direct financing of a specific element of the franchise package
C) Not providing detailed operational information until 10 days before signing the contract
D) Requiring franchisees to spend a certain percentage of profits on advertising
Topic: The Right Way to Buy a Franchise
AACSB: Ethical Reasoning
35) Which of the following is an indication of a dishonest franchiser?
A) Very thorough and complete operations and training manuals
B) Recommending retail prices and providing a list of “approved” suppliers of products and
materials needed for running the franchise
C) Attempts to discourage you from allowing an attorney to evaluate the franchise contract
D) Not providing a set of detailed earnings projections for each potential franchisee
Topic: The Right Way to Buy a Franchise
AACSB: Ethical Reasoning
36) When buying a franchise, the potential franchisee should first:
A) search for start-up capital for local banks.
B) evaluate him/herself as to the fit with the franchise.
C) work in a similar business or industry for a year.
D) contact the local chamber of commerce for information on the local economy.
Topic: The Right Way to Buy a Franchise
AACSB: Analytic Skills
9
37) When evaluating a franchise, the potential franchisee should:
A) interview both current and former franchisees.
B) only interview franchise employees as franchisees vary greatly in their opinions.
C) ask about what oral promises the franchiser will give regarding future earnings.
D) look at the local labor market to see if there is a pool of appropriate candidates for
employment.
Topic: The Right Way to Buy a Franchise
AACSB: Analytic Skills
38) Typically, franchise contracts:
A) are short-term, for 10 years or less.
B) are heavily weighted in favor of the franchisee due to federal regulation.
C) do not cover transfer and buyback provisions.
D) are not negotiated by established franchisers.
Topic: Franchise Contracts
AACSB: Analytic Skills
39) The most litigated subject of the franchisee agreement is:
A) franchisee fees.
B) advertising expenditures.
C) termination of contract.
D) resale price maintenance clauses.
Topic: Franchise Contracts
AACSB: Analytic Skills
40) Under what circumstances would a typical franchiser have the right to cancel a franchise
contract?
A) The franchisee declares bankruptcy.
B) The franchise fails to follow retail pricing guidelines set by the franchiser.
C) Within five days of the initial signing of the contract
D) If the franchiser decides he/she wants to buy back the franchise
Topic: Franchise Contracts
AACSB: Analytic Skills
10